CRPS Are Share Capital, Not Financial Debt: Supreme Court Bars Section 7 IBC Initiation
- REEDLAW
- 54 minutes ago
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REEDLAW Legal News Network reports: In a pivotal ruling, the Supreme Court held that Cumulative Redeemable Preference Shares (CRPS) issued in lieu of past dues constituted share capital rather than financial debt under the Insolvency and Bankruptcy Code. The Court observed that redemption of such CRPS was legally impermissible in the absence of distributable profits, eligible reserves, or fresh-issue proceeds as mandated under Section 55 of the Companies Act, thereby eliminating the possibility of a “default” for the purpose of initiating proceedings under Section 7 of the IBC.
The Supreme Court Bench of Justice J.B. Pardiwala and Justice K.V. Viswanathan, while adjudicating a Civil Appeal, reaffirmed that CRPS issued against outstanding obligations retained the character of share capital and did not acquire the attributes of a financial debt. The Bench emphasised that since redemption was statutorily barred without meeting the mandatory financial preconditions under Section 55, the alleged default could not be sustained in law. Accordingly, the holder of such CRPS lacked the status of a financial creditor and was not entitled to maintain an application under Section 7 of the IBC.
The Supreme Court noted that the appeal arose from the judgment of the Appellate Tribunal dated 09.04.2025, which had affirmed the Adjudicating Authority’s dismissal of the Appellant’s application under Section 7 of the Insolvency and Bankruptcy Code, 2016. Both forums had concluded that the Cumulative Redeemable Preference Shares (CRPS) subscribed by the Appellant constituted an investment in share capital and not a debt, and that no liability had become due since the statutory conditions for redemption had not been satisfied. The dispute stemmed from EPC contracts executed for a large industrial project, where outstanding receivables were proposed to be converted into preference shares. Acting on this understanding, the Appellant’s Board approved the issuance of CRPS as a means to strengthen the Respondent’s financial position and improve prospects of eventual recovery. The Respondent thereafter allotted 25 crore CRPS of ₹10 each, amounting to ₹250 crores, which the Appellant accepted as part of the agreed commercial arrangement.
The Appellant later entered the Corporate Insolvency Resolution Process in 2018. During the process, the Respondent asserted unilateral adjustment of CRPS liabilities against alleged counter-claims, but its revised claim was rejected by the Resolution Professional, and that rejection attained finality. The Resolution Professional then issued a demand seeking recovery of over ₹632 crores, including ₹310 crores towards the redemption value of alleged matured CRPS, which the Respondent disputed. Consequent to the commencement of liquidation, permission was obtained under Section 33(5) of the IBC to initiate appropriate recovery proceedings. The Appellant thereafter invoked Section 7 of the IBC against the Respondent, contending that the CRPS had matured for redemption and that the Respondent’s financial statements characterised the CRPS liability as an unsecured loan. The Adjudicating Authority dismissed the petition, holding that non-redemption of preference shares could not convert share capital into “debt” and that redemption was legally permissible only from profits, reserves, or proceeds of a fresh issue as mandated under Section 55 of the Companies Act, 2013.
The Appellate Tribunal upheld this view, reaffirming that preference shares formed part of the Respondent’s share capital, and that statutory restrictions governing redemption precluded characterisation of CRPS as debt or financial debt. It also held that the earlier operational dues had stood fully extinguished upon issuance and acceptance of CRPS. Before the Supreme Court, the Appellant argued that the true nature of the transaction was subordinate debt with the commercial effect of borrowing, asserting that the CRPS structure was a device masking an underlying loan. The Respondent countered that preference shares, by definition, constituted share capital and were fundamentally distinct from financial debt under the IBC, and that equating equity instruments with debt would undermine the statutory framework distinguishing creditors from shareholders.
The Supreme Court considered the core question of whether the Appellate Tribunal and the Adjudicating Authority were justified in holding that the Appellant was not a financial creditor and therefore not entitled to maintain a Section 7 application. The Court reaffirmed that Section 7 proceedings required a demonstration of three indispensable elements: the existence of a financial creditor, the presence of a financial debt, and an occurrence of default as defined under Sections 5(7), 5(8), 3(11), and 3(12) of the IBC. It was observed that a default would arise only when a debt became due and payable and remained unpaid. In the present case, the CRPS had not attained maturity for lawful redemption, as the Respondent lacked profits, reserves, or proceeds of a fresh issue required under Section 55 of the Companies Act. Consequently, no default had occurred in law.
The Court held that holders of CRPS remained preference shareholders and did not acquire the status of financial creditors. By consciously accepting CRPS through a commercial decision supported by board resolutions and correspondence, the earlier receivables had been fully extinguished and transformed into share capital. The Court rejected the contention that the CRPS constituted borrowing under Section 5(8)(f), emphasising that funds infused as share capital could not amount to debt or financial debt. It further held that accounting classifications or descriptions in financial statements were irrelevant, as book entries could not override statutory provisions of the Companies Act or the IBC. Relying on settled principles in decisions such as Innoventive Industries Limited v. ICICI Bank and Another, REEDLAW 2017 SC 08563, Radha Exports (India) Private Limited v. K. P. Jayaram and Another, REEDLAW 2020 SC 08527, and Anuj Jain Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited etc, REEDLAW 2020 SC 02502, the Court reiterated that the hallmark of financial debt is disbursal against consideration for the time value of money, which was absent in the CRPS structure. Since the foundational elements of financial debt, financial creditor status, and default were not satisfied, the Supreme Court concluded that the Section 7 application was not maintainable and upheld the dismissal of the proceedings.
Mr. Niranjan Reddy, Senior Advocate, represented the Appellant.
Mr. Mukul Rohtagi and Mr. Ritin Rai, Senior Advocates, appeared for the Respondent.
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